By Michael Henley, CFP®, CPWA®, CRPC®, RMA®
At Brandywine Oak Private Wealth, we often help clients navigate the complexities of their restricted stock units (RSUs). While these shares provide opportunities for growth and financial gain if a company performs well, they also come with specific rules that should be understood before cashing out.
Here’s how RSUs work, and important things to know before making a decision that could have significant tax consequences.
How RSUs Work
Restricted Stock Units (RSUs) are shares of a company that are offered as part of an employee’s compensation package. They are considered “restricted” because certain conditions must be met before the shares can be transferred and owned by an employee. These conditions could be contingent on an employee remaining at the company for a period of time, or other performance milestones.
Navigating Common Mistakes
Understand Your Vesting Schedule
When a company grants RSUs, they come with a vesting schedule—meaning they are received over a multi-year period. This is often used to incentivize employees to remain at the company over a period of time. Each year or milestone, a percentage of shares “vest,” and become freely owned by the employee. If an employee is awarded $90,000 of RSUs, a typical vesting schedule is they will receive $30,000 of RSUs in year 1, $30,000 in year 2, and the final $30,000 in year 3. Understanding your company’s vesting schedule is critical to avoid missing out on milestones, avoid unplanned tax consequences, and align your shares with your overall financial plan.
Plan for Taxes When Shares Vest
The second instance when tax consequences may be incurred is when shares are sold. Taxation policy on RSUs is similar to that of outright stock ownership: if the shares increase in value between when they vest and when you sell them, you’ll pay tax on that extra gain. If your intention is to hold the RSU shares, it is critical to understand your holding period as shares held less than one year could be taxed at the highest ordinary income rate of 37% plus a 3.8% additional investment income tax (plus state income taxes). This is precisely why, if your intention is to properly diversify the RSUs upon receipt, our advice is to sell the shares immediately, minimizing any potential capital gains exposure. Understanding these tax implications can help you manage your liability, so consulting with a tax advisor is always a good idea.
Plan for Taxes When You Sell
The second instance when tax consequences may be incurred is when shares are sold. Taxation policy on RSUs is similar to that of outright stock ownership: if the shares increase in value between when they vest and when you sell them, you’ll pay tax on that extra gain. If your intention is to hold the RSU shares, it is critical to understand your holding period as shares held less than one year could be taxed at the highest ordinary income rate of 37% plus a 3.8% additional investment income tax (plus state income taxes). This is precisely why, if your intention is to properly diversify the RSUs upon receipt, our advice is to sell the shares immediately, minimizing any potential capital gains exposure. Understanding these tax implications can help you manage your liability, so consulting with a tax advisor is always a good idea.
Don’t Keep All Your Eggs in One Basket
An RSU effectively amounts to a cash bonus in the form of company stock shares. Employees often hold on to these shares as they vest, rather than selling some shares and diversifying their portfolio. This can cause undue risk because it could tie a significant portion of your wealth to the performance of one single company. Instead, consult your financial advisor to determine if selling some of your RSUs and spreading funds over a broader range of investments could help reduce unnecessary risk. Most employees already have excess risk in the company they work for because their salary and benefits as well as additional unvested RSUs are also concentrated in the company!
Know the Wash Sale Rule
Generally speaking, an investor may claim some net losses on the sale of stock as a deduction on their tax return. However, the Wash Sale Rule prevents taxpayers from deducting lost income if the individual re-buys the same stock within 30 days of the initial sale. For RSUs, you could run into this situation if you sell shares at a loss and subsequently receive more shares through vesting within 30 days. When selling shares, it is important to carefully plan these transactions if you wish to deduct losses.
Work With an Experienced Financial Advisor
Brandywine Oak Private Wealth works with employees from companies such as DuPont, FMC, Chemours, AstraZeneca, and Dow. Our firm is well-versed in the nuances of employee compensation packages of these companies, and offers guidance to optimize RSUs so you can avoid critical mistakes.
You can get started today by scheduling a meeting to find out how we can help address your unique needs. Call (484) 785-0050, email contact@BrandywineOak.com , or get started online now.
About Michael
Michael Henley is the Founder and CEO of Brandywine Oak Private Wealth, a private wealth management and registered independent advisory firm headquartered in Kennett Square, PA. Over the course of his 20-year career, Michael has been dedicated to helping wealthy individuals and families plan and manage all aspects of their finances and investments. With a passion for helping others look behind the curtain and understand the complex world of finance, he develops close relationships with clients as he helps them progress toward their financial goals. Michael loves to provide clarity and alleviate financial anxiety, help prevent families from overpaying in taxes, and give wealthy families permission to enjoy their life savings. He says, “No work is more gratifying than giving families outcomes to what matters most to them.”
Michael holds the CERTIFIED FINANCIAL PLANNER®, Certified Private Wealth Advisor®, Chartered Retirement Planning Counselor℠, and Retirement Management Advisor® designations. Residing in Chadds Ford, PA, with his two children, he enjoys outdoor activities, particularly maintaining trails on his property, hiking with his dogs, and being an actively engaged dad, always taking his kids everywhere. Michael’s latest hobby is tennis, he is obsessed with hot yoga, and he recently started ice skating to join his daughter Savannah. He can also be found moving logs to the firepit with his son Maverick on the tractor. Michael serves on the board of United Way of Southern Chester County and loves mentoring younger advisors. Great mentors helped him succeed, and he’s convinced that every leader needs to both have mentors and be a mentor. To learn more about Michael, connect with him on LinkedIn.
Brandywine Oak Private Wealth is a registered investment adviser. Registration does not imply a certain level of skill or training. Information presented is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies. Investments involve risk and, unless otherwise stated, are not guaranteed. Be sure to first consult with a qualified financial adviser and/or tax professional before implementing any strategy discussed herein. Past performance is not indicative of future performance.